Question ID:
2017_3463
Legal Act:
Regulation (EU) No 575/2013 (CRR) as amended
Topic:
Supervisory reporting - FINREP (incl. FB&NPE)
Article:
99
Paragraph:
5
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Regulation (EU) No 680/2014 - ITS on supervisory reporting of institutions (as amended)
Article/Paragraph:
163
Disclose name of institution / entity:
No
Type of submitter:
Credit institution
Subject Matter:
Promise to pay and financial difficulties
Question:

If a customer misses a payment he or she can promise to pay the amount due in the same month (after we have contacted our customer). Should we define such a situation as a promise to pay or as a payment reminder? We have currently defined this situation as a promise to pay (‘Toezegging’ in Dutch), but that may diverge from the EBA perception of the associated risk with a promise to pay. As there have been several discussions on this topic with our supervisor we would appreciate EBA guidance. This should provide us with sufficient information to define this event in such a way that there can be no misinterpretations about meeting forbearance criteria.

Background on the question:

If a retail customer misses a loan payment, there can be several reasons why this event occurred, such as: 1. Financial difficulties 2. Incidental financial carelessness 3. Backlog in their financial administration 4. Incorrect direct debit and/or standing order transaction 5. Communication error in direct debit and/or standing order transaction For us, the underlying reason is key in determining an appropriate measure, if any. If our assessment of the situation does not indicate any financial difficulties or if the event is not expected to result in financial difficulties, we will not propose any measure. In order for us to establish this, we will contact our customer to discuss the situation. The customer promises to pay before the end of the month (and therefore before the next payment is due). We will only agree with this option if we do not consider the customer to be in financial difficulties or expect to be in the near future. To us, this does not constitute as a forbearance measure (see ITS guidance 2015/1278 (9 July 2015) par 174 (a) in which is stated that there is a rebuttable presumption that forbearance has taken place in a situation where a contract would be more than 30 days past due without modification). Only if we allow the customer to pay the amount due in the consecutive month (after the next payment date) we consider this to qualify as a forbearance measure. In the Single Rulebook Q&A (Question ID: 2013_654) a description has been provided for the so-called ‘arrangement to pay’ and ‘promise to pay’. In the EBA answer there is an explicit assumption that an arrangement to pay and promise to pay are extended to borrowers in state of financial difficulties. For us, this does not reflect our risk management processes as the majority of customers with a missed payment are not in or expected to be in any financial difficulties. The most obvious action is to send a payment reminder, but being a customer-centric institution we prefer to actually contact our customer to verify that there are indeed no financial difficulties. If our customer is in financial difficulties we will propose appropriate measures to structurally resolve the difficulties which will qualify as forbearance measures. EBA Answer (Question ID: 2013_654): … We understand that Arrangements to Pay are agreements by which a bank agrees to a postponement of payments due a date after the normal due date of the contract. The modalities of this postponement seek to maximize the ability of the counterparty to service its debt. Following the Arrangement, if the counterparty is allowed to repay the amounts due in one payment only, the Arrangement is called a Promise to Pay … Based on the examples provided by the submitter, our understanding is that Arrangements to Pay or Promises to Pay are extended to borrowers in state of financial difficulties and allow them to postpone the contractually-agreed date of their payments due to a later date in order to maximise their ability to service their debt. We understand that Arrangements or Promises to Pay are an arrear management tools and are extended to borrowers that are in financial difficulties. …

Date of submission:
11/08/2017
Published as Final Q&A:
04/10/2019
EBA Answer:

Based on our understanding the described internal processes are agreements by which a bank agrees to a postponement of payments due to a date after the normal due date of the contract. This postponement is subject to the following conditions:

1)     The bank evaluates and discusses the situation with the debtor,

2)     The debtor promises to pay the due amount before the end of the month,

3)     After assessing all the information the bank comes to the conclusion that the reason the debtor didn’t pay in due time is unrelated to his financial situation. (i.e. the debtor doesn’t experience financial difficulties).

Annex V, Part 2, 240 of the ITS defines forborne exposures for the purposes of Template F 19.00 as:

“debt contracts in respect of which forbearance measures have been applied”

According to Annex V, Part 2, 240 of the ITS forbearance measures are applied when both of the following conditions are met:

1)     A concession towards a debtor is made,

2)     The debtor is experiencing or about to experience difficulties in meeting its financial commitments (“financial difficulties”).

Thus, a concession alone does not count as a forbearance measure. This is also explicitly stated in Annex V, Part 2, 252  of the ITS:

“Exposures shall not be treated as forborne where the debtor is not in financial difficulties”.

Accordingly, the situation described above doesn’t fulfil the second condition.

Consequently, the arrangement also doesn’t fall under the forbearance measures listed in Annex V, part 2, paragraph 252 a) – d). Exposures subject to such arrangements shall therefore not be counted as forborne.

Status:
Final Q&A